The Ancient Metal
of Kings continued to dazzle this week, challenging $550. In honor
of this awesome event, headlines in the financial press trumpeted
gold’s 25-year highs. While technically correct, indeed gold
did last close over $550 a quarter century ago to the month in
January 1981, the media’s fixation on today’s gold highs is quite
misleading.

Prudent investors,
and rightfully so, tend to be wary when they hear of prices trading
near 25-year highs. The core tenet of successful investing is to
buy low and sell high. So if an asset is trading at a
quarter-century high-water mark then odds are its price is pretty
darned high at the moment and therefore a bad buy, right?

If I was not a
student of the markets and hadn’t spent years studying gold, I know
I would be reluctant to invest in anything near a 25-year
high. Buying high is anathema to the whole contrarian investment
philosophy of buying cheap and selling dear. But gold, believe it
or not, is still a great contrarian investment even at
today’s quarter-century nominal highs.

How is this
seemingly absurd thesis possible? The answer is the measuring stick
for any investment pricing, the US dollar, has radically
changed in the last several decades. A dollar today is worth vastly
less than a dollar was 25 years ago, the last time gold closed over
$550. Comparing nominal dollar prices of decades past with dollar
prices of today is not valid, a horribly flawed apples-to-oranges
kind of thing.

Do you remember
prices in the early 1980s? They were almost trivial compared to
what we face today. The median home price in the US was $76k. You
can hardly even buy an empty lot in suburbia for this today, let
alone a house. The median American income was under $18k. Today
$18k is actually below the official US poverty line for a
family of four! A first-class postage stamp ran 15˘. The average
new car was about $7k.

So a quarter
century ago the $550 it cost to buy an ounce of gold went a heck of
lot farther in terms of buying real goods and services than it would
today. This is, of course, due to the
inflation of
the number of dollars in circulation. The US government via the
Federal Reserve relentlessly prints money and as this new money
created out of thin air filters into the US economy it directly
competes for limited goods and services and bids up their prices.

I have written a
lot about real-world examples of inflation in the past if you would
like some background. These include John Law’s notorious
18th-century
inflation in France, the
North Slope oil
boom in Alaska, and even
virtual inflation
in the online computer games so popular today. Anytime the money
supply of a particular era or place grows faster than the supply of
goods and services on which to spend it, general prices are
inevitably driven relentlessly higher. This financial law is as
immutable as gravity.

Since 1981 dollars
were so different from today’s in terms of purchasing power due to
the US inflation since, it makes no sense at all to compare those
dollars with today’s dollars straight up. The more I study the
financial markets, the more I am convinced that looking at any
price chart running for more than a decade or so without considering
the impact of inflation is horribly distorting and leads to poor
decision making. Incidentally this applies to the general
stock markets
too.

While I have been
writing about inflation-adjusted, or real,
gold and oil
since June 2000,
those comparisons modeled monthly data. The most widely
accepted measure of US inflation, the Consumer Price Index, is
published once a month so most inflation analysis also uses monthly
data. But the problem with monthly financial data is it clips off
most of the major closing highs and lows that the media use to
proclaim XX-year milestones.

In this new series
of essays, which will grow more important as gold approaches its
1980 all-time non-inflation-adjusted, or nominal, highs of $850, I
am using daily gold data for much higher resolution. The
financial media and Wall Street, which have never liked commodities,
are going to be working overtime to falsely convince people that
gold is expensive today in order to dissuade them from multiplying
their capital in this bull. They don’t like to see capital diverted
from general stocks into commodities.

I built a nearly
10k-row spreadsheet that melded the monthly CPI inflation data with
the daily gold data to create a CPI-inflated real gold data series
running back before 1970. While I am a long-time opponent of the
horribly
manipulated CPI since it lowballs inflation, I used it here
because it is conservative and widely accepted as authoritative.
While real gold would be considerably higher when using MZM or M3
money supplies as an inflation proxy, this essay would not be as
credible with mainstreamers if I went that route.

So is gold really
at a breathtaking 25-year high once the radically changing measuring
stick of the US dollar is considered? Not even close! So far in
real terms gold has barely clawed back above where it languished for
years in the mid-1990s. The recent real-gold prices still
look dirt cheap compared to average gold prices of the last 35 years
or so. Investors can still buy low today!

Gold last closed
above $550 nominal on January 23rd, 1981, almost 25 years ago to the
week. Yet adjusted for inflation an ounce of gold was really worth
$1266 that day in purchasing-power terms. Thus in order to
truly see the quarter-century gold highs that the financial media is
wailing about, gold in today’s dollars would have to head north of
$1250. 25-year gold highs today my foot!

Anyone who thinks
comparing nominal numbers across 25 years is acceptable ought to
give 4/7ths of their gross income to charity and live off the
remaining 3/7ths. Such a 56% cut in pay today would create the
equivalent of living in an expensive 2006 world with early 1980s
nominal salary levels. The average cost of living as measured by
the lowballed CPI is up 2.29x since then and today’s dollar is worth
at least that much less.

This long-term
real gold chart helps put our current gold bull into proper
perspective. Sound perspective is crucial in investing. If
you gain the proper perspective before you deploy your capital it
vastly improves your odds of making wise decisions and multiplying
your fortune. But if you invest without a proper perspective the
battle is probably lost before it even starts. One cannot buy low
and sell high if their perspective is distorted!

The young gold
bull of the last five years that looks so impressive on
nominal charts
is just barely starting to get interesting in real terms in the last
several months. From the mid-1970s until the mid-1990s gold rarely
went below $500 in today’s dollars so $500 gold really is
historically cheap. Today gold would have to challenge $1000
before it started getting expensive and it would have to rocket up
near $2200 to hit all-time real highs.

Gold, of course,
is a competing
currency with the US dollar. When it is considered in these
terms, gold could even be far cheaper today than the CPI-inflated
chart above indicates. Since the early 1980s governments worldwide
have grown their fiat currencies by rates averaging around 7% a
year. But over this same period of time the global gold supply has
only grown about 1% a year. It’s actually this slow natural growth
rate, or low inflation rate, due to the extreme difficulty in mining
gold that has made it the world’s premier currency for six
millennia.

Assuming these
growth rates are roughly correct, and compounding them for the 25
years since 1980, the world’s money supply has ballooned by 5.4x.
Meanwhile the global gold supply is only up 1.3x. Dividing these
25-year growth estimates yields a ratio of
global-fiat-currency-supplies-to-gold-supplies of about 4.2x. Now
there is 4x as much fiat paper floating around relative to gold as
there was in 1980! The $850 spike high in January 1980 multiplied
by this ratio yields an all-time gold high of $3570 in today’s
dollars.

I offer up this
rough example to illustrate that gold is becoming more and more dear
relative to the reams of fiat currencies in circulation all
over the world today. If a similar fraction of investors starts
bidding on gold again at some point that was bidding it up three
decades ago, we could see a euphoria spike high ultimately far
exceeding even the $2200 CPI-adjusted high charted above. Gold is
radically undervalued relative to fiat currencies and a lot more
fiat exists that can bid on it now than 25 years ago.

With my core
thesis that gold is cheap today in real terms explained, now
we can branch out into some other interesting sub-views of this
fascinating dataset. In order to aid this comparison, we marked six
of the greatest secular gold highs in recent decades on the chart
above and labeled their nominal and real levels. These labels carry
into the subsequent four charts that examine different sub-sections
of this real gold data.

The last great
gold bull, in the 1970s, is really illuminating when viewed through
the lens of today’s dollars. While our current bull won’t unfold in
exactly the same way, this real view of history helps to properly
set our expectations on the rough magnitude of gold moves we might
expect this time around.

Now this is
a Great Gold Bull, feast your eyes! Gold went up about 11x in real
terms in the 1970s, from $200 in today’s dollars to nearly $2200 in
today’s dollars! Over this period of time this gold bull went
through three
distinct stages just as ours is likely to do today. They are
initially driven by currency devaluation, then surging global
investment demand, and finally a popular speculative mania.

Back in the early
1970s Stage One ended near $500 or so in today’s dollars,
incidentally the same real levels that are triggering our transition
into Stage Two
today. Once investment demand started kicking in gold surged higher
to $750 real initially but then ground back down under $500 real in
the next couple years before reasserting itself. Ultimately Stage
Two drove gold above $1000 real before the general public got
involved.

Now Stage Two in
the 1970s was not much fun between 1975 and 1977 when gold gradually
slumped and then recovered. Quite a few folks have asked me whether
we could be in for another major mid-bull multi-year correction in
gold again this time around. While I freely acknowledge that it
could happen again since anything is possible in the
markets, I don’t think it is likely. Today’s investment scene is so
vastly different from the mid-1970s.

Believe it or not,
our wonderfully benevolent dictatorship in Washington actually made
gold bullion illegal for US citizens to own from 1933 to
1974! Washington finally restored our right to own gold, which is
Constitutional money, back on December 31st, 1974. So when Stage
Two kicked in during the mid-1970s Americans were largely not
involved on the buy side initially.

After 41 years of
gold bullion being considered an Enemy of the State there was not
really a ready market for it as an investment. And it wasn’t
particularly easy to buy immediately after that either. At the time
coin stores specialized in rare gold coins, which generally weren’t
declared illegal by Franklin Delano Roosevelt. It wasn’t easy to
buy the bullion coins without premiums so popular today. And
investors had to go through the trouble of opening a futures account
to trade gold, and market information didn’t flow as well back then.

Today’s gold bull
is in a drastically different environment, the Information Age.
American contrarian investors have been buying and selling gold for
three decades and are very comfortable doing it. Coin stores are
now everywhere and buying gold bullion coins today is as easy as
buying groceries. Stock traders can now even trade
gold ETFs from
within their stock accounts, bidding up gold without even having to
mess with futures. And information flows fast today.

This instant
information flow is probably the greatest factor in why a multi-year
slump is unlikely in today’s bull. Investors today chase
performance, and relative to past generations we seem to have more
information at our fingertips today thanks to the Internet than even
the masters of the investing universe had decades ago. The higher
the gold price runs today, the more it is reported on and the more
investors grow interested. They then chase this bull, throwing in
their capital which drives it up even higher creating a virtuous
circle of demand.

At some point all
this awareness spills outside of contrarians, outside of
mainstreamers, and a powerful gold lust takes root in the general
public. This is when Stage Three dawns. The final stage of a
secular bull is the vertical blowoff mania when the public rushes in
to get a piece of the action. Frenzied public buying pushes prices
stratospheric, often doubling in about a year. Just as the
NASDAQ doubled in its final year before its
early 2000 crash,
gold also doubled from $1100 real to $2200 real leading into early
1980.

This parabolic
spike driven by a popular mania is the signal that a bull is
over. When you see gold prices double in a year, when you hear hot
tips about gold stocks at cocktail parties, when all the financial
media ever seems to talk about is the commodities bull, this is the
time to get out. Vertical moves higher on long-term charts are
never sustainable and always precede crashes.

Has gold gone
vertical today? Has it doubled in the past year? Not even close!
There is no rush like a gold rush and believe me you will absolutely
know it when the next one arrives. Stage Three is phenomenally
lucrative and we are not even close yet this time around. The total
lack of blowoff in today’s gold market when charted on a decade
chart is further evidence that gold is cheap today, not dear.

Our next chart
looks at the early years of the 1970s gold bull in this real-gold
dataset. It helps illustrate the raw magnitude of gold moves that
are possible in today’s dollars as we continue to transition into
Stage Two.

In the early 1970s
gold in 2006 dollars was trading near $200, which is remarkably
close to the $290ish real levels from which our current gold bull
launched back in April 2001. Gold then went on to carve a wild and
highly volatile uptrend channel with huge swings in both
directions. In particular from late 1973 to early 1974 gold soared
from $400 real to over $700 real. This upleg is fascinating because
it marked the beginning of Stage Two.

Today we are also
transitioning into Stage Two once again, and gold’s latest run
started near $425 real back in July. Near $550 today some think
this latest 29% upleg is ridiculously large. But if today’s gold
upleg managed to march up a similar percentage to the first Stage
Two upleg of the 1970s, we would be looking at the next major
interim top near $750 again. While I don’t suspect today’s
upleg will hit such lofty levels before correcting, this real gold
data just shows what is possible and expands our expectation
horizons.

Really though, the
character and volatility signature of the early 1970s bull is much
different from today’s. The red numbers near each interim gold high
above are real rGold numbers, real gold divided by its
200-day moving average. As gold surged above its 200dma in new
uplegs it stretched wildly higher at times, up to 62% over its
200dma. By comparison our current gold bull has yet to even exceed
20% over its 200dma in real terms.

Today’s gold bull,
also shown on a zeroed chart to highlight the immense difference in
volatility, has been far more sedate. Gold’s uptrend channel this
time around is tight and relatively calm. This far more modest
volatility signature will probably work out to our advantage
though. With gold advancing in a very orderly fashion this time
around, odds are it won’t advance so fast that it needs a multi-year
correction like the mid-1970s to bleed off mid-bull speculative
excesses.

Gold is probably
less volatile today for a variety of reasons. The gold market is
far broader and deeper today with many more investors and
participants than in the 1970s. More speculators actively betting
against each other leads to more accurate pricing with fewer wild
anomalies. The less high gold gets stretched over its 200dma in its
uplegs prior to its periodic and healthy corrections, the shorter
these corrections need to be to restore sentiment balance.

And unlike the
1970s when some major currencies were severing ties to gold and
creating huge market distortions, today no paper currency on the
planet is backed by gold. Thus governments, while they are still
active in gold to some extent, have nowhere near as big of footprint
relative to the total market as they did in the 1970s. Few other
entities are able to buy or sell gold at government scales, thus
moderating volatility today.

Information flow
is probably a factor here as well. Investors today can react far
more rapidly to a surge or slump in gold and enter their trading
orders instantly online without having to go through the cumbersome
futures machinery for trading. These quicker reactions to
developments tend to moderate both the upside potential of uplegs
and downside potential of corrections and reduce systemic
volatility.

Our final real
gold chart zooms in to the past decade. Quarter-century gold highs
today? Not if one is honest and considers the relentlessly eroding
purchasing power of the fiat US dollar.

This week gold hit
its highest level in real terms since August 1993, roughly 13-year
highs. Now a 13-year high is exciting and certainly nothing to
sneeze at, but it is a far cry from a 25-year high. When you think
about gold today being at about the same levels it was at in the
mid-1990s, which was near the tail end of a multi-decade bear
market, it creates an entirely different perspective of gold’s
relative cheapness or dearness today.

The financial
media shrilly trumpeting quarter-century nominal highs as if gold is
on the verge of a massive secular crash is incredibly naďve.
Investors who are swayed by these poor arguments risk missing the
next two-thirds, indeed the biggest two-thirds, of our current gold
bull. Making multi-decade price comparisons casually without
considering the impact of inflation is terribly flawed and leads to
an extremely distorted perception of market realities.

Yes gold will
inevitably get temporarily overbought and will crest at its next
major interim high here sooner or later and then correct back down
to its 200dma as it has done many times before in this bull market.
But gold is not yet anywhere close to being expensive in the long
secular terms that really matter for investors. At Zeal we will
continue speculating on individual gold uplegs as we have done for
this entire bull, but I want to make sure investors understand that
gold is not high today by historic standards.

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speculator or your gold investments extend into gold stocks, you
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The bottom line is
gold is nowhere close to being expensive yet relative to history in
the real terms that matter. This new bull market in gold will
probably not give up its ghost until it approaches historical real
extremes well above $1000 in today’s dollars. While gold will flow
and ebb within this bull, the entire secular uptrend itself is not
in danger as long as gold remains relatively inexpensive within the
context of modern history.

It is not prudent
or valid to compare today’s dollars to dollars of decades past
without adjusting for inflation. Whenever the financial media
insists on doing this it is lazy at best and intentionally trying to
mislead investors at worst. We won’t really see 25-year gold
highs until the metal exceeds $1250!